You are speaking on the session on new LNG supply at the 17th World LNG Summit in December. What are your views on the global supply/demand outlook through 2020?
It is widely accepted that the world will be oversupplied with LNG for the rest of this decade. Overly-bullish expectations of Asian demand have not materialized and the approval of many new projects in the US and Australia have exacerbated this temporary glut. LNG from many of these new projects will struggle to find a home in the short-term and will be increasingly sent to the short-term markets. However, this anticipated oversupply will not last forever. Sustained low LNG prices over the near-term will bring new entrants into the LNG market seeking a more competitively priced, cleaner-burning fuel than conventional petroleum. As we enter the next decade, many other demand factors will narrow the supply/demand gap. Access to new technologies, namely Floating, Storage, and Regasification Units (FSRUs), offer many of these same smaller players the ability to import marginal volumes of LNG for minimal capital costs. Finally, LNG has many market applications, such as shipping, that have yet to be captured. The real question is, who will capture the “next wave of LNG demand”. You will likely see (and already are) many of the majors shy away from FIDs; however independent LNG developers like NextDecade, are poised to “buy the dip.” Factoring in the EPC cost environment and the lead time for a land-based export facility, we believe we are well positioned to be the leader of the next wave of US LNG.
Perhaps the better question is what happens if new projects don’t take FID and demand is allowed to outpace supply into the next decade? We could see a substantial demand shortage with significant price implications…
Where do you consider to be the best LNG demand growth prospects?
Marketers are focusing much effort on China and India given the sheer scale of growth potential in these countries for natural gas. However, I believe there are a few other specific markets that also deserve attention.
First, new and emerging markets – 25% of LNG demand growth through 2025 is expected to come from new LNG import markets. FSRUs can bring LNG to these new markets more quickly and efficiently and present a valuable opportunity for NextDecade to access underserved or new LNG markets. FSRUs are attractive as they offer lower capital requirements, shorter lead times and significantly less risk to developers than onshore re-gas facilities.
The second market that deserves to be more carefully examined is made up of nations that have historically exported LNG, such as Indonesia, Trinidad, Algeria and Yemen, but are now facing either progressively-declining or “at-risk” domestic reserves on top of export commitments. These players will increasingly be looking for ways to balance their existing commitments with domestic demand and diminishing reserves, creating an opportunity for new LNG suppliers to step in.
Finally, while not technically “new” demand, many long-term LNG contracts are set to expire over the next few years. Nearly 70 Mtpa of contracted volumes will have expired by the time our Rio Grande LNG project comes online in 2021 and another 70 Mtpa by just 2025. Buyers will be looking for lower-cost LNG with more flexible contract terms and NextDecade is poised to offer both. US LNG, including Rio Grande LNG, will become the most competitive new supply source for LNG in the world given its low feed gas and capital costs.
What changes are being made to keep new liquefaction projects competitive?
Perhaps one of the most significant changes is simply choice of project location. The U.S. has emerged as an attractive option for new liquefaction projects for several reasons, all contributing to more competitive projects. U.S. LNG represents a new source of low-cost supply due to new technologies brought to market and lowering capital requirements, breaking industry orthodoxy of oil-linked contracts, and utilizing its well-established regulatory process.
Items that are becoming increasingly important in the world to drive down costs include:
– Value Engineering
– Labor Costs: The US is the leader
– Proven Engineering and Technology: The “no novelty” approach
– Pressure to Lower EPC Margins: New project pipelines are “drying up”
– EPC Workforce vs EPCM: Reduced costs and better QAQC
An excellent example of this is our own Rio Grande LNG project. We, along with our EPC partner CB&I, have focused on selecting a proven technology and design which will materially de-risk our project, reduce timeline uncertainties, and most importantly reduce capital and operating expenditures.
Even so, many US projects have taken different approaches to cost reductions, particularly when it comes to scale and build, i.e. stick build vs. modular.
The cost of feed gas is another major driver. U.S. LNG will continue to benefit from cheap natural gas, able to compete favorably with any other natural gas supply source worldwide. Vast quantities of natural gas have been proven as reserves in the U.S. and access to the global LNG (gas) market will be crucial for US E&P companies. There will be increasing pressure domestically for U.S. E&P producers to access markets.
Will shorter term contracts become the norm?
Given the current buyers’ market, there is no doubt that buyers are attempting to negotiate more flexible terms. This includes both tenor and volume. However, from the perspective of new LNG project developers, contract terms will not change substantially over the near-term simply for financing reasons. That is not to say that (new) LNG buyers will not have access to the market; it is likely that large portfolio players and traders, will step in the middle to absorb the differences. You are already seeing this phenomenon today. This is also true for credit requirements. At NextDecade we are offering unique solutions for both upstream gas suppliers and LNG customers that satisfy each of their individual needs while also making our project fully financeable.
You are sponsoring the 17th CWC World LNG Summit in Barcelona this December – what are you most looking forward to at the Summit?
I certainly enjoy all the conference events and presentations, but perhaps my favorite portions of these CWC events are the one-on-one discussions I get to have with the participants between sessions and after-hours. Leaders in our field from around the world attend this event and it is a great opportunity to share ideas, learn from one another and perhaps even begin (or renew old) business relationships!
Kathleen Eisbreener will be speaking at the CWC World LNG Summit in Barcelona on Wednesday 14 December 2016, discussing ‘Regaining the Balance: When Will We Need New LNG Supply to Come Online?’